Grand Central Public Market v. United States
| Decision Date | 12 January 1938 |
| Citation | 22 F. Supp. 119 |
| Court | U.S. District Court — Southern District of California |
| Parties | GRAND CENTRAL PUBLIC MARKET, Inc., v. UNITED STATES. |
Clark J. Milliron and George H. P. Shaw, both of Los Angeles, Cal., for plaintiff.
Peirson M. Hall, U. S. Atty., Alva C. Baird and E. H. Mitchell, Asst. U. S. Attys., and Eugene Harpole, Sp. Atty., Treasury Dept., all of Los Angeles, Cal.
This action is brought to recover income taxes alleged to have been illegally assessed and collected by the Commissioner of Internal Revenue or his agents. Jury trial was waived and the case was submitted, in part on stipulated facts and in part on oral testimony.
Plaintiff corporation, Grand Central Public Market, Incorporated, had been for some time previous to 1925 engaged in the business of leasing market space and subletting this space, after dividing it into stalls or concession booths, to tenants who sold produce. Subleases were for periods of from five to ten years — usually five. Prior to 1925 no bonus agreements were executed, but in that year plaintiff demanded from subtenants bonus payments, in cash or partly in cash and the balance in interest-bearing notes; in consideration of which plaintiff agreed to hold space for delivery to such subtenants on November 1, 1929, for occupancy thereafter. These bonus agreements were in writing and contained the following clauses:
Collections prior to the year 1929 under said bonus agreements, for leases to be effective in 1929, were as follows:
Year Amount
1925 $138,950.00
1926 66,750.00
1927 16,095.00
1928 20,000.00
___________
Total ....... $241,795.00
None of these bonus payments or the interest thereon, as received, were entered in the general account books of the plaintiff but were recorded in a separate ledger called the "bonus ledger." Nor were bank deposits from these collections made in the corporation's regular commercial accounts, but were deposited in a special interest-bearing account in the United States National Bank in Los Angeles. The interest on these bonus collections, together with interest on notes given by subtenants in lieu of cash, aggregated during the years 1925 to 1928, both inclusive, the sum of $35,827.73. During the year 1929 these interest collections amounted to the sum of $13,337.42, making a total of $49,165.15. All interest items were deposited in or credited to the special bank account, and were also entered in the bonus ledger.
As of November 1, 1929, all bonus moneys, together with the interest collected thereon, were for the first time recorded in the corporation's general books of account, being then transferred from the bonus ledger. At this time also there was transferred the sum of $46,000 and interest in the amount of $712.74, received by plaintiff during the year 1929 on account of bonus agreements for the leasing of space to be occupied by subtenants in the year 1934. These 1929 bonus collections had likewise been previously entered in the bonus ledger.
Plaintiff corporation did not include in its federal income tax return for any of the years from 1925 to 1928 amounts received by it during those respective years on account of such bonus payments or interest. Plaintiff, however, did include, in its income tax return for the year 1929, all of such sums so received in years prior to 1929 and, in addition thereto, all bonus and interest payments received during the year 1929, in connection only, however, with contracts for delivery of space during that year of 1929. Plaintiff did not include in its income tax return for 1929 any bonus or interest payments received on account of contracts for delivery of space in 1934.
The total of such bonus receipts and interest, so accounted for in the 1929 income tax return, which was filed on March 11, 1930, was $291,560.15. The return showed other net income for 1929 of $42,998.19, or a total net income, including the bonus and interest receipts, of $334,558.34. Plaintiff's total income tax payments for that year, including the tax on all bonus receipts returned for taxation, were as follows:
Year Amount
March 11, 1930 $ 9,200.36
June 4, 1930 9,200.36
Sept. 8, 1930 9,200.35
Dec. 8, 1930 9,200.35
__________
Total $36,801.42
The evidence shows that on June 8, 1925, the corporation recorded a resolution in its minute book, listing all of the various spaces available for lease and directing that all Agreements for Leases, to be executed for the period from 1929 to 1939, should be made only upon the payment of certain bonuses listed in said resolution. The plan and schedules of leases attached lists over 70 tenants with individual bonuses up to $10,000, and an aggregate bonus expected of $242,000.
On the 13th day of July, 1925, the corporation recorded in its minute book a resolution directing that funds realized from bonus accounts and funds received as deposits on leases, for the period from 1929 to 1939, be deposited in the United States National Bank in Los Angeles.
On the 11th day of January, 1926, the corporation recorded in its minute book a resolution stating that the corporation was then offering to its tenants agreements for leases from and after November 1, 1929, and was receiving under said agreements certain moneys, with the understanding that they were to be returned to tenants in the event the corporation should thereafter be unable to deliver possession, and directing that all of said funds be held by the corporation in a "special trust account" in the United States National Bank in Los Angeles, and further directing that any of said "trust funds" as the finance committee of the board might deem advisable should be loaned by the corporation upon such terms and security as said finance committee might determine.
On the 14th day of March, 1927, the corporation recorded in its minute book a resolution discharging its then existing leasing committee and requiring that all future applications for leases or transfers be presented directly to the board of directors for approval before such contracts were made. Thereafter, there was recorded in the minute book every bonus agreement for leases to be made in the future, disclosing in each instance the name of the tenant, the stall leased, the term of the agreement, and the conditions of bonus payments. The plaintiff's minute book contains minutes of directors' meetings held during the period from June 4, 1925, to October 14, 1929, spread over pages numbered consecutively from page 47 to page 92. In these minutes are recorded transactions in connection with the bonus agreements in question covering 25 pages of that minute book.
Revenue Agent Carl A. Wolfe made an examination of plaintiff's books in June, 1928, checking the tax return for the year 1926. Revenue Agent Claude A. Dewey made a similar examination in March, 1930, covering the year 1928, and Charles S. Murphy made his examination in October, 1931, covering the year 1929. This last examination was made at the express request of plaintiff in response to a letter, dated May 28, 1931, advising the Commissioner of Internal Revenue that the income tax returns of the corporation had theretofore included certain items of income, growing out of leases and being in the nature of bonuses and interest, which had not been correctly reported in the proper years.
In filing its income tax returns for 1931, plaintiff taxpayer discontinued its previous practice, and included in its return for that year all bonus payments and interest actually collected in that year, even though a large part thereof was on account of bonus agreements for delivery of space in 1934. When another revenue agent, O. H. Whitney, made an examination of the books for the year 1931, he objected to this practice and recommended the reversal of said items of bonus receipts and the exclusion thereof from taxable income, for the express reason that such income should have been considered as "deferred income in accordance with procedure in prior years."
On page 11 of Revenue Agent Whitney's report on the 1931 return (Plaintiff's Exhibit 6) appears the following:
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